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Texas Supreme Court and the Implied Covenant to Market Oil & Gas

In 2008, the Texas Supreme Court heard a class action case against Phillips Petroleum Co. The case was Bowden v. Phillips Petroleum Co., in which the Plaintiffs alleged that Phillips had underpaid their oil and gas royalties. The Supreme Court remanded part of the case back to the trial court.

When the case was remanded, the representative of the class, Royce Yarbrough, amended the complaint against Phillips to allege that the company breached their implied covenant to market and that this is what contributed to the underpayment of royalties to the royalty owners. Phillips argued that to add a new claim on behalf of the class required a new class certification motion and hearing. The trial court disagreed and Phillips Petroleum appealed. The Texas Supreme Court considered this issue in Phillips Petroleum Co v. Yarbrough, et al.

The Supreme Court actually reviewed several issues, including res judicata issues from the Bowden case and whether they had jurisdiction over the interlocutory appeal on the decision by the trial court regarding the implied covenant to market. But the most interesting issue for oil and gas lawyers in Texas concerns the substantive issue of implied covenants to market vis-a-vis express covenants to market.

An implied covenant to market is, obviously, “implied,” rather than specifically expressed in the oil and gas lease. It is an agreement to market the oil and gas within a reasonable time and at the best price possible. In the Yarbrough case, some of the class members involved did have express covenants to market in gas royalty agreements they signed that amended their oil and gas leases with Phillips. Phillips argued that these express covenants superseded any implied covenant. Yarbrough argued that an implied covenant in the Gas Royalty Agreement merely amends the express covenants that may exist in some of the leases.

The Texas Supreme Court, in a decision written by Justice Debra Lehrmann, held that the addition of the new implied covenant to market claim required a new request for class certification and remanded the case to the trial court. The opinion does note that the absence of an express covenant in the parties’ gas royalty agreements does not automatically impose an implied covenant to market in leases that had an express covenant to market. The Supreme Court found that the effect of these express covenants in the leases of some class members was an issue that was not argued or decided in the previous Bowden case. The Supreme Court thus determined that since this was a significant new issue that had not yet been litigated, and the trial court’s decision to allow this new claim changed the composition of the class. The Supreme Court went on to hold that the trial court abused its discretion in certifying the new class without an analysis of the effect of this new issue on class certification and remanded the case, ordering the trial court to do a proper analysis of the issue.

Cases like Bowden and Yarbrough show why leases and gas royalty agreements can be so complicated for those leasing their mineral rights, and why it is incredibly important to have an experienced oil and gas attorney review a lease before you sign it.

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